The FDR Framework is the backbone for a 21st century financial system. Under this framework, governments ensure that every market participant has access to all the useful, relevant information in an appropriate, timely manner. Market participants have an incentive to analyze this data because they are responsible for all gains and losses.

Thursday, August 1, 2013

Trader explains why dishonesty rewarded on Wall Street and only transparency can end bad behavior

In his must read Guardian column, Joris Luyendijk interviews a Trader from London's City who explains why dishonesty is rewarded on Wall Street and how only transparency can end misbehavior.

Regular readers know that sunlight is the best disinfectant. The trader describes what happens when Wall Street and the City are left to operate behind a veil of opacity.

The trader presents petty theft as an every day occurrence.

"Where I worked people seemed obsessed with power structures and keeping on top. For instance when someone was made redundant a remaining trader would do a deal between his book and that person's, creating a profit in his book and a loss in that of the person leaving...."

Left unsaid is that the trader creating a profit in his own book has his compensation based on the profitability of his book. From the bank's perspective, the position hasn't changed, just the payout. So effectively, the trader has stolen money from the bank.

The trader explains how they use opacity to take risks knowing that if the bet pays off they are well compensated and if the bet loses they will just move on to the next bank.

"In the end the bank is like a shell. You need a place to trade from, this is how we saw our bank. Sometimes an entire team can be poached and go from one bank to another. There's no loyalty either way. And the top at your bank has no idea what's going on, how could they? Why would anyone tell them what's going on?

The trader explains Wall Street and the City's ethics.

"Of course traders are constantly inquiring across the bank: what's happening? What are our big clients like institutional investors doing? Then they 'front run' those investors; buying ahead of them so when the price rises due the subsequent buying, they pocket the difference.

"Chinese walls [between deal making, asset managing and trading bankers]? Bullshit. We could simply log on to our system and see what was happening and what they were doing all the time.

"If there is a lot of money at stake then people will not adhere outside rules and they will evade Chinese walls....

Next, the trader explains who Wall Street and the City use the complexity and resulting opacity of the financial products they sell to benefit at the expense of their customers.

"My advice to people dealing with the financial sector is: never buy anything that's complex. Because the more complexity the more opportunities there are to screw you over.

Finally, the trader highlights how important the role of caveat emptor (buyer beware) is when dealing with Wall Street and the City.

Traders see the capital markets as a zero-sum game. If they win, you must lose.

Individuals and small companies see their relationship with the bank as a partnership with the goal of both parties winning. This makes individuals and small companies susceptible to being mistreated and sold products like interest rate swaps.

I just can't get my mind around how banks can still call clients in the corporate world and say, look we've got this great idea that's going to make you a lot of money. I mean, what are they thinking?

Nobody in the City can be trusted because they don't work for you, they work for themselves.

"I do wonder why there seem to be so many somewhat dishonest people in the bank, and why the most dishonest are often the ones to walk away with the most money."

About this blog

A blog on all things about Wall Street, global finance and any attempt to regulate it. In short, the future of banking and the global financial system.

This blog will be used to discuss and debate issues not just for specialists, but for anyone who cares about creating good policies in these areas.

At the heart of this blog is the FDR Framework which uses 21st century information technology to combine a philosophy of disclosure with the practice of caveat emptor (buyer beware).

Under the FDR Framework, governments are responsible for ensuring that all market participants have access to all the useful, relevant information in an appropriate, timely manner. Market participants have an incentive to use this data because under caveat emptor they are responsible for all gains and losses on their investments; in short, Trust but Verify.

This blog uses the FDR Framework to explain the cause of the financial crisis and to evaluate financial reforms like the ABS Data Warehouse.